You’ve worked hard to build your business. You’ve got a good, loyal staff. Perhaps retirement is on the horizon, but you’re not quite there yet. Yet you want to make sure your firm — and your staff — are secure.
While you could consider a traditional sale and negotiate remaining on board after the fact, an employee stock ownership plan, or ESOP, is an exit strategy that could help ensure the legacy of your business while also providing generous tax benefits. The structure allows owners to remain at the helm, if desired, and provides participating employees with a vested interest in the firm going forward.
In 2018, the most recent year for which data is available, 279 new ESOPs were created, covering more than 37,000 participants, according to the National Center for Employee Ownership. In total, there were approximately 6,416 ESOPs in the US, holding total assets exceeding $1.4 trillion. In some instances, ESOPs can work very well for staffing companies for a variety of reasons, Managing Director George Thacker of New York-based investment bank CSG Partners explains. They can be great companies to own but challenging to sell, and an ESOP structure provides a “built-in buyer” for the business. In addition, there is a host of tax incentives to encourage owners and companies to implement ESOPs — including that owners can sell to an ESOP and not pay capital gains taxes on the transaction.
CSG specializes in ESOP deals nationwide and has completed about a dozen ESOP transactions in the staffing and HR space. Thacker clarifies that ESOPs are expensive undertakings and typically best suited for firms earning at least $2 million annually and those with owners willing to remain on board for at least a few additional years.
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Burnett Specialists. It was a great option for Sue Burnett. As founder and president of Burnett Specialists, she did not want to sell outright. Last year marked the 45th anniversary of the company, which operates in five Texas cities. And in December, the staffing provider will celebrate its 10th year as an ESOP.
She and her husband were approaching retirement age, she explained to me, and her staff “was getting anxious about what was going to happen to our company if something happened to us,” noting many of her employees have been with her for 10 to 40 years.
Although Burnett fielded some “very good offers,” she wasn’t ready to retire and didn’t want to sell the company outright; she’d seen many of her friends being fired after selling their companies, and then the employees left and the brands were never the same. Burnett didn’t want that to happen to her company. “This is my baby,” she explained. “I founded the company in 1974 and I’ve been running it the entire time. Its more than just a company, it is my life.”
Other notable ESOP deals involving staffing firms include Eastridge Workforce Solutions, which ranks on SIA’s list of largest US staffing firms, in 2019; Sterling Engineering, an engineering support services and technical staffing firm, in 2015; Tennessee-based The Hamilton-Ryker Group Inc. in 2012; and IT staffing services provider Internal Data Resources, in 2011.
How it works. Burnett remains in charge and notes selling to the ESOP was a way to “cash out without leaving.” She and her husband were paid off through the company’s profits over a seven-year period. And since ESOPs pay no federal income tax, that money saved helped to pay them off.
Stock is based on salary, accumulated after the first year and vested after three years. However, it cannot be cashed out until the worker reaches age 65. Currently, there are about 550 vested in the ESOP, including both internal staff and temporary workers.
Of course, you’ll want to work with an advisor that is familiar with ESOPs. The Burnett Specialist deal was led by CSG’s Thacker. Also, for business owners who want to immediately walk away from the business, a traditional M&A is a better bet.
“If you want to sell your company and leave, an ESOP is not the thing do,” Burnett told me. “For those who want to stay with the company and help their staff become owners of the company, it is a way for an owner to cash their money out of the company and also help their staff really accumulate a lot of money over the years.”
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